Perfect Competition Overview

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Questions and Answers

What determines the price in a perfectly competitive market?

  • The firm
  • The industry supply and demand (correct)
  • Government regulations
  • Marginal cost

What shape is a perfectly competitive firm's demand curve?

  • Vertical
  • Downward sloping
  • Upward sloping
  • Horizontal at market price (correct)

How is total revenue (TR) for a perfectly competitive firm calculated?

  • Both A and C (correct)
  • Marginal Cost × Quantity
  • Price × Quantity
  • Average Revenue × Quantity

In perfect competition, what is true about marginal revenue (MR)?

<p>Equal to price (B)</p> Signup and view all the answers

What do firms in a perfectly competitive market earn in the long run?

<p>Zero economic profit (A)</p> Signup and view all the answers

Which of the following is NOT a characteristic of perfect competition?

<p>Significant barriers to entry (A)</p> Signup and view all the answers

In the short run, a firm will continue operating if:

<p>P &gt; AVC (B)</p> Signup and view all the answers

Long-run equilibrium in perfect competition occurs when:

<p>All of the above (D)</p> Signup and view all the answers

What defines a monopoly market structure?

<p>Only one seller exists (C)</p> Signup and view all the answers

The demand curve for a monopolist is typically:

<p>Downward sloping (B)</p> Signup and view all the answers

Marginal revenue for a monopolist is:

<p>Less than the price (B)</p> Signup and view all the answers

Profit maximization for a monopolist occurs when:

<p>MR = MC (C)</p> Signup and view all the answers

A barrier to entry in a monopoly might include:

<p>Legal restrictions (A)</p> Signup and view all the answers

The welfare cost of monopoly primarily occurs due to:

<p>Monopolies restricting output (D)</p> Signup and view all the answers

Price discrimination by a monopolist occurs when:

<p>Different prices are set based on consumer willingness to pay (C)</p> Signup and view all the answers

Flashcards

Price Determination in Perfect Competition

In a perfectly competitive market, the price of a good or service is determined by the interaction of industry-wide supply and demand forces. This means that individual firms have no control over the price and must accept the market-determined price.

Demand Curve for a Perfectly Competitive Firm

A perfectly competitive firm faces a horizontal demand curve at the market price. This means that the firm can sell any quantity of output at the prevailing market price without affecting the price.

Total Revenue in Perfect Competition

Total revenue (TR) for a perfectly competitive firm is simply the product of the price (P) and the quantity (Q) sold. This reflects the fact that the firm can sell any amount at the prevailing market price.

Marginal Revenue (MR) in Perfect Competition

In perfect competition, marginal revenue (MR) is equal to the price (P). This is because the firm can sell an additional unit of output without changing the price.

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Economic Profit

Economic profit is the difference between total revenue (TR) and total costs, which include both explicit costs (out-of-pocket expenses) and implicit costs (opportunity costs). It represents the true return on a firm's resources.

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Perfect Competition

A market structure with many firms selling identical products, with free entry and exit, and no significant barriers to entry. Each firm is a price taker, meaning it cannot influence the market price.

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Long-run Equilibrium in Perfect Competition

The point where the firm's marginal cost equals the market price, resulting in zero economic profit in the long run.

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Monopoly

A market structure where there's only one seller of a unique product or service, with significant barriers to entry.

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Demand Curve for a Monopolist

The demand curve faced by a monopolist, which is downward sloping, reflecting the ability to charge higher prices for less output.

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Marginal Revenue (MR) for a Monopolist

The additional revenue a monopolist earns from selling one more unit of output. It's always less than the price of the unit.

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Profit Maximization for a Monopolist

The point where a monopolist's marginal revenue equals its marginal cost, maximizing its profits by balancing additional revenue and additional costs.

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Barriers to Entry in a Monopoly

Factors that prevent new firms from entering a market and competing with existing firms.

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Welfare Cost of Monopoly

The loss of economic efficiency caused by a monopoly's underproduction, reducing total surplus (consumer surplus + producer surplus) in the market.

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Price Discrimination

The practice of charging different prices to different buyers based on their willingness to pay.

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Natural Monopoly

A situation where economies of scale are so significant that a single firm can produce the entire market output at a lower cost than multiple firms.

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Study Notes

Perfect Competition

  • Price Determination: Price is determined by market supply and demand, not by individual firms.
  • Demand Curve: A perfectly competitive firm's demand curve is horizontal at the market price.
  • Total Revenue (TR): Calculated as Price × Quantity or Average Revenue × Quantity.
  • Marginal Revenue (MR): Equal to the price in perfect competition.
  • Economic Profit: Calculated as Total Revenue minus the sum of explicit and implicit costs.
  • Accounting Profit: Excludes implicit costs.
  • Sunk Costs: Irrecoverable costs.
  • Profit Maximization: Occurs when Marginal Cost (MC) equals Marginal Revenue (MR).
  • Shutdown Point: Firms should shut down if price falls below Average Variable Cost (AVC).
  • Long-Run Equilibrium: Firms earn zero economic profit in the long run.
  • Short-Run Supply Curve: The firm's marginal cost curve above the average variable cost curve.
  • Market Entry: Entry of new firms reduces long-run economic profits to zero.
  • Features of Perfect Competition: Homogeneous products, free entry and exit, numerous buyers and sellers.
  • Short-Run Operation: Firms continue operating if price is above average variable cost.
  • Long-Run Equilibrium Characteristics: Price equals marginal cost, average total cost, and zero economic profit

Monopoly

  • Market Structure: A monopoly has one seller.
  • Demand Curve: A downward-sloping demand curve.
  • Marginal Revenue (MR): Less than price.
  • Profit Maximization: Occurs where Marginal Revenue (MR) equals Marginal Cost (MC).
  • Barriers to Entry: May include economies of scale, legal restrictions, and high startup costs.
  • Welfare Cost: Underproduction relative to perfect competition leads to a deadweight loss.
  • Price Discrimination: Charging different prices to different customers.
  • Natural Monopoly: Economies of scale dominate production.
  • Output Compared to Perfect Competition: Monopolies produce less output at a higher price.
  • Deadweight Loss: Reduction in total surplus caused by underproduction.

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